Will, India, remove, oil, subsides,, ever?

International Energy Agency (IEA) wanted India to remove the highly regulated oil subsidies which keeps the price for the consumers artificially low. India says, are you kidding me. Comparing with USA, where it is actively priced, rise in the prices have reduced demand. IEA thinks the same could work in India. I don’t doubt that, Neither does Indian economists. But, Indian politicians don’t want it. It might never get done. India has shifted from one party, to two party and now to a multi-party democracy. Every vote counts and every alliance counts. So, everyone knows that the two major national parties (Congress and BJP) cannot come into power on their own. Given this dynamic political scenario no one wants to dare a reform like this. Though, finance ministry has recently deployed a panel to report on the feasibility of removing subsidies it has rejected it right away.

Headed BK Chaturvedi, the panel has recommended a hike of Rs2.5 per litre of petrol every month until March 2009 and a hike of 0.75 for diesel per month until 2010. It has also recommended on the removal of import duty of 2.5% on petrol and diesel. It also recommended a reduction in the excise duty from Rs. 13.75 per litre to Rs.10. Instead, the government chose to give oil bonds to the companies (PSU’s).

The bottom line is no one has the chutzpah to remove the subsidies and still be in power (especially now). Those two are mutually exclusive events with a probability of zero for the former. Instead, they will target the low hanging fruits like granting more SEZ’s by taking land away from farmers without appropriate compensation or more reservations for the OBC’s and the ‘marginalized’. So who will be the first person to even do this? If someone does this, he deserves a Bharat Ratna immediately.

India gives subsidies to consumers, gives the state owned oil companies oil bonds and money (from union budget, which again is coming from Indian tax payer), drives private companies out of business, Indian consumer oblivious to the global scenario does not temper with the fuel usage. This is a viscous cycle. No one wants to break it. Indian government has high import taxes for oil imports which makes it difficult to arrive at the true price.

Privately owned LPG’s are selling the gas cylinders at Rs. 650. This might be the real value of LPG. State owned companies sell it around 370. Reliance used to sell at 4-5 rupees (per liter, for petrol) higher than the state owned corporations like Indian Oil. But they have closed down many stations after the recent surge in oil prices. Shell sells a liter of premium petrol (they stopped selling regular petrol) for around Rs 70. Could that be the real price of  petrol. You never know, unless the subsidies are removed and import taxes reduced. Until that happens Indian consumer will never feel the pinch and thus the demand will always outstrip the supply.

PS:  A letter to IEA.

Dear IEA,
We know removing the subsidies will temper the oil demand. We also know that we are charging a hefty import duty on oil companies. We can reduce the import duty but that would be a big hole for the exchequer. We can remove the subsidies on the oil too. But that would be stupid because, we will not be able to write another letter if we do that. By that we don’t mean we are not going to take any action. We will. We are waiting for a super hero (or heroine) to get this done.

Until then, Yours Indian.